Gateway tops 3Q estimate, inks distribution pact with AOL

3 January 200212:43 am GMT

Gateway Inc. (NYSE: GTW) crept past analysts' estimates in its third quarter Wednesday, earning $113.2 million, or 35 cents a share, on sales of $2.18 billion. It also signed an $800 million distribution deal with AOL.

First Call consensus expected the PC maker to earn 34 cents a share in the quarter.

The $2.18 billion in sales represents a 20 percent improvement compared to the year-ago quarter when it made $80.6 million, or 25 cents a share, on sales of $1.8 billion.

In the quarter, Gateway shipped more than 1.2 million units, a 39 percent jumped versus the same period last year.

Company officials said its non-PC income accounted for 15 percent of its total profit this quarter and that its Gateway.net Internet service subscriber base eclipsed the 600,000-user mark.

"Our revenue stream is growing richer and more diverse quarter-by-quarter, giving us a very strong and unique position in the industry," said CEO Ted Waitt in a prepared release.

AOL to invest $800 million over two years

Part of that diversification was explained by another announcement that Gateway and America Online Inc. (NYSE: AOL) will team up to offer Internet service and e-commerce and marketing opportunities.

Under terms of the deal, AOL will invest $800 million in the next two years. In return, Gateway will be featured and aggressively marketed on all its PCs. AOL will also take over control of its Gateway.net service.

Company officials said both companies will benefit from the enhanced e-commerce and marketing opportunities.

Gateway will receive $180 million in AOL stock in the deal and will spend $85 million to market software and Gateway products and services on America Online's brands.

AOL expects to take a pre-tax charge of $30 million in connection with its acquisition of an interest in Gateway.net subscribers in the quarter in which the transaction closes.

Gateway expects to take a pre-tax charge of $26 million in the fourth quarter of this year for a combination of restructuring charges, transition costs associated with the transaction and costs incurred to build Gateway.net infrastructure.

Strong demand worldwide

Gateway officials credited strong growth in the U.S. for the upside surprise as its consumer unit sales grew 44 percent and revenue grew 27 percent.

"We're making steady progress on all fronts," said COO Jeff Weitzen in a prepared release. "For the first time in 10 quarters, each of our PC business segments saw unit growth of better than 30 percent and our non-system revenue is now on pace to become a billion-dollar-a year business.''

Last quarter, Gateway topped Street estimates when it earned $89 million, or 56 cents a share, on sales of $1.9 billion.

First Call consensus expects Gateway to return a profit of $1.42 a share in the fiscal year.

Twenty of the 24 analysts following the stock maintain either a "buy" or "strong buy" recommendation.